Budget 24-25: A Progression Towards an Unfinished Agenda of Reforms

India’s post-election budget was clearly a signalling budget doubling down on unfinished reform agendas while maintaining fiscal prudence.

In this blog, we analyse this year’s budget from two perspectives:

• The major physical, financial, and human capital allocations.
• The major developments on the climate and sustainability agenda, in line with the country’s goal of achieving net zero emissions by 2070.

Major Allocations:

Physical capital – The budget continues the infrastructure push through public investment (Table 1). The Ministry of Railways, Road Transport and Highways, Housing and Urban Affairs combined have a 49% share in the budgeted capex of INR 11.1 trillion.

The transfer to states including INR 1.5 trillion in special loan assistance to states adds another 14.6% if utilised. These coupled with announced measures to increase the contribution of the private sector in infrastructure investment should gain traction in the overall investment outlook in the medium term.

Higher allocations for rural and urban housing with support through interest subvention schemes should boost demand in the real estate sector. Having said that, one intriguing capex allocation this year is INR 66,197 crores (~6% of total capex) for new schemes under the Department of Economic Affairs with no clear details of the scheme.

Table1. Capex Allocation Across Selected Ministries (INR Crore)

Source: Budget FY25

Financial capital – Abolishment of angel tax for investors and reduction of corporate tax on foreign companies is expected to ease access and flow of financial capital. The stock market, for now, remains skeptical about the upward revisions in the capital gains tax. The government’s signal of maintaining fiscal prudence via limiting its market borrowings, nonetheless, should instill confidence in the bond market (GoI budgeted INR 11.6 trillion in market borrowings than INR 11.8 trillion in the revised estimates for FY ’24).

We can expect the softening of bond yields thereby hoping for crowding in more private investments.

Human capital – The impact of the proposed INR 1.48 trillion for strengthening human and intellectual capital, via education, employment and skilling, on consumption and household savings will be visible in the medium to long run.

The forward-looking INR 2 trillion employment linked incentives intend to offer formalisation of our workforce in the organised sector. The success of this supply side push, however, would depend upon the demand for labour in the labour-intensive industries.

The likely impact, hence, on the informal sector employment of the budget announcements is too early to be judged.

MSME Push:

Acknowledging that the micro, small and medium matters is a major development this year. The Economic Survey and the Union Budget underlined the critical importance of MSMEs in the value chain, employment in Viksit Bharat, and the green transition.

The survey signals a market-oriented approach nudging the financial sector to provide better access to formal finance, easing compliance burden by the regulator, thereby, reducing the informality in the sector.

The budget also signals the intent to address the financial capital challenges for the MSMEs while the impetus on the skilling of the labour force will shape the future human capital requirements of the sector too.

The Major Announcements Include:

• A credit guarantee scheme for purchasing machinery and equipment.
• A self-financing guarantee fund to provide guarantee cover up to Rs 100 crores.
• Enhancing the limit of Mudra loans.

The Sustainability Angle:

The budget continued the quest for green transition by proposing a taxonomy for climate finance, a policy document on energy transition pathways, and a roadmap for the transition of hard-to-abate industries from PAT to Carbon market mode.

Some of the major centrally sponsored and central sector schemes which observed adjustments in resource allocation will also have a bearing on sustainable development goals (SDGs) and climate adaptation and mitigation efforts (Table 2).

Table2. Outlay on Some Major Schemes (INR Crore)

Source: Budget FY25; Note: ‘BE’ refers to Budget estimates and ‘RE’ refers to revised estimates

Continuing its climate finance push via green bonds, schemes worth INR 32,061 crores are now eligible for funding through the Sovereign Green Bonds route (almost 44% increase from the revised estimates of FY ’24 and 90% increase from FY’23).

Furthermore, GoI consistently has increased allocations to solar energy and production of energy efficient electric locos (approx. 63% of schemes under SGBs in FY ’23 to 75% in FY’25). This coupled with the RBI allowing investments by foreign investors in IFSC in such bonds could provide needed impetus for enhancing climate finance flows.

While, to some extent, this indicates the policy focus and flow of climate finance, it should also draw attention to scope for, atleast, private climate finance in other sectors.

Overall, despite expectations of electoral handouts, the budget manages a balancing act of social welfare and a market reforms-oriented approach. While the GoI enhanced its allocations for social welfare via affordable housing and employment scheme, more progress on the unfinished agenda of reducing employment in the informal sector is still warranted.

On the market reforms, the private sector, next, would require a clear roadmap on the factor market reforms (as stated in the FM speech) to navigate its investment decisions.

Looking ahead, the Government of India would need to continue prudent fiscal management without compromising on growth dynamics. On the revenue side, this would require rationalising revenue expenditure while reducing its reliance on dividends from RBI & public sector; and cesses and focusing on better tax revenue collections instead (Table3).

Table3. Major Tax and Non-Tax Revenue Receipts (INR Crore)

Source: Budget FY25

It will, then, be interesting to see how the private sector plays its part in the growth story as nudged in the Economic Survey this year.

More importantly, can the private sector truly be the catalyst for India’s green transformation?